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Banks' housing bias bad for economy: NAB banker

Chris Zappone

Australian banks' preference for writing home loans rather than lending to business may pose a risk to the banking system and the overall economy, according to a leading banker.

Joseph Healy, business banking head of National Australia Bank, said the bias of banks toward retail mortgage lending could hobble the economy's long-term growth by skimping on loans to small businesses. The money flowing into housing may create other distortions such as fuelling excessive investment, he said.

''With the apparent bias towards to the household sector, we shouldn't discard the possibility of asset bubbles being created there,'' Mr Healy said.

''We're not saying we believe there is an asset bubble but shouldn't close our minds to the possibility of that happening.''

Since the emergence of the global financial crisis, small businesses have complained that they have borne the brunt of tighter lending requirements, with interest rates on their loans falling less than other borrowers. In addition, competition among banks has been reduced as several smaller lenders either exited the market or where swallowed up by bigger rivals.

''This is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end bad for Australia,'' he said.

In 2000, every $1000 of home lending was matched by roughly the same amount for business. That ratio has since shifted so that today, for every $1000 of home lending, only about $600 is available for business, according to NAB research.

Home lending comprised 43 per cent of the lending of the big four banks - Commonwealth Bank, Westpac, NAB and ANZ - in 2000, but rose to 57 per cent this year. In the same time, business lending has dropped from 46 per cent to 35 per cent, according to NAB's figures.

''The lack of access of finance has been a problem but also the cost of finance,'' said Peter Strong executive director of Council of Small Business of Australia.

Banks are currently charging as much as 2 percentage points more than the standard mortgage rate to many small businesses, Mr Strong said.

Among the big four banks, NAB has the largest small-to-medium business loan book and the smallest residential mortgage book.

Most-overvalued market

In contrast to the trends in most rich nations, Australia's house prices have continued to rise even during the global economic slowdown. Analysts have cited loan availability but also a relatively strong economy and a shortage of affordable stock for the divergence.

Some of that price fizz is coming off, though, with home price growth moderating in the past few months. Even so, the recent prices gains have pushed the national city median home price to $468,000, according to RP Data-Rismark.

The Economist magazine last week said a ''fair value'' analysis of global property shows Australian property the most overvalued of any of the 20 countries the publication tracks, based on a comparison of the current ratio of rents to prices to a long-term average.

Mr Healy's comments come as analysts speculate that Australia's major banks may be squeezed in coming months by rising off-shore funding costs, with the banks' exposure to the residential mortgage market drawing greater scrutiny on global markets.

Mr Healy delivered a speech on business lending to the American Chamber of Commerce in Sydney this afternoon.

Professor of Economics & Finance at the University of Western Sydney Steve Keen lauded Mr Healy's comments.

''I'm delighted to see somebody in the banking sector come out and say this because it's really about speculation being funded by the banks rather than investment.''

''To me the essential thing banks should be doing is providing working capital to firms.''

czappone@fairfax.com.au

BusinessDay

15 comments

What a propaganda pressure to make ordinary people to stand in a que at real estate agance to sell their homes.We are pushed to believe that house prices will go down.Misleading sttistic- house prices should be mesured by cost of square meter-houses are much more begger than beofreSecond lie- our houses and block of land are much bigger to compare with " old Europe" or e.g. Japan.Australian property is too cheap and it can fall only if " so called market"( or who manage it) wants to and than everything will be bought by them cheaper.

Commenter

Antipropagandist

Location

Melbourne

Date and time

July 15, 2010, 1:39PM

And i'm sure the rising cost of wholesale funding and the Basel II Capital Accord have nothing to do with any of this right guys? What would we prefer - higher capital regulation on the banks by APRA and the safest banking system in the world, with slightly higher business rates, or hand out financing until the cows come home and end up like the U.S?

Commenter

Another banker

Location

Sydney

Date and time

July 15, 2010, 1:41PM

I'm off to the USA to look at buying a property there, where I can buy a brand new gorgeous 4 bedroom dream home on 18 acres in one of the most desirable areas of the southeastern US for around $750k. Here in my inner Brisbane neighbourhood, $750k would buy a dated 1930s house. There is no way I would buy what is now obviously very near the very top of one of the greatest house price bubbles of modern times, as called by The Economist magazine only this week. I'd trust the disinterested analysts of The Economist over some self-interested real estate spruiker any day of the week.

Commenter

Blowing Bubbles

Date and time

July 15, 2010, 2:00PM

Of course it is not a conspiracy that there is not a single day that media does not beat drums of "overpriced housing" abrakadabra.

Someone must be getting really desperate.

As to home lending vs business lending - it is not a surprise to anyone that home lending is where the banks getting the nost of the profits, and business lending - this is where most of the losses are.

To say that current proportions disbalance something is the same as publicly declare themselves ignorant in the economy. Housing is and has always been the main engine of our economy, and everything else hinges on it, and our GDP follows housing starts like tail follows the dog.

Commenter

Michael

Location

Sydney

Date and time

July 15, 2010, 2:14PM

Blowing Bubbles - US market is the most overpriced in the world. They have produced 32 million of excess dwellings and before their population is not increased by 100 million, their prices have nowhere to go but fall. This means decades and decades.

If you want to catch falling sword - go there, but do not be surprised if in 10 years you will struggle to get $40K for your $750K property.

Australian market at the moment is grossly underpriced, but it is not going to stay that way for very long.

Commenter

Michael

Location

Sydney

Date and time

July 15, 2010, 2:20PM

"Of course it is not a conspiracy that there is not a single day that media does not beat drums of "overpriced housing" ... Someone must be getting really desperate."

Michael | Sydney - July 15, 2010, 2:14PM

Indeed, MoS - but who is displaying more desperation: the media that publish the articles, or the self-confessed spruiker who peppers every article with multiple "I'm alright, Jack" rebuttals?

The spruiker has much to lose if a crash is indeed coming. Selling over-leveraged IPs won't be an option: there won't be any greater fools left to bail you out. And jacking up rent to cover the dwindling capital gains won't work either: with so many 'new landlords' these days, tenants can always find a better deal.

Commenter

Hagbard

Location

Melbourne

Date and time

July 15, 2010, 2:43PM

Michael of Sydney, I have printed out your comment about the AU market being grossly under priced and the USA market falling by over 80% from today over the next ten years. Every bubble mania has its share of deniers. People who cannot see the bubble they're in and the danger they're about to experience. There are famous quotes from mid 1929 about shares reaching a permanently high plateau, and that crashes are all but impossible. I hope your statement will one day join them.

Commenter

Cluster

Location

Adelaide

Date and time

July 15, 2010, 3:22PM

For those interested the economist article Global house prices: Froth and stagnation has Australia as 61.1% over valued.

Interesting!!!!

Commenter

Joe

Location

Neutral Bay

Date and time

July 15, 2010, 3:41PM

The business that I work for requires customers to spend money. Not much money going around. I asked some of my customers what they thought was going on. They basically said that housing is so expensive to have that they cannot afford much else. Overpriced housing (not interest rates) is really sucking the life blood out of this country. Business can't get loans and also customers can't afford a red cent on anything but loans, rent and perhaps food.

Commenter

Rachel

Date and time

July 15, 2010, 3:48PM

I've noticed this since the start of the year. My competiors have bowed out because of their lack of funding. Some have rung me directly to discuss our company taking over there work as they cannot afford the wages or their clients have contacted me because their existing contractors could no longer service them.

A lot of the new business that are starting up have done so with their own money. This is my case. In five years I have never taken a business loan and I will never need to. There is a recession coming and now is not a good time to take out a loan of any sort. If people haven't seen it coming it is because they haven't been paying attention. Ask any small business and they will tell you the truth about the economy.Expect house prices to fall as soon as the main stream media starts reporting on it.